In re Qualcomm Inc. FCPA Stockholder Derivative Litigation

Citation: Not availableDocket: 11152-VCMR

Court: Court of Chancery of Delaware; June 16, 2017; Delaware; State Appellate Court

Original Court Document: View Document

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The Court of Chancery of the State of Delaware, presided over by Vice Chancellor Tamika R. Montgomery-Reeves, addressed Defendants' motion to dismiss the Verified Amended Stockholder Derivative Complaint in the case of In re Qualcomm Inc. FCPA Stockholder Derivative Litigation (C.A. No. 11152-VCMR). The Complaint alleges that the Qualcomm board willfully ignored significant warning signs related to violations of the Foreign Corrupt Practices Act (FCPA), resulting in a cease-and-desist order from the U.S. Securities and Exchange Commission (SEC) in March 2016. Plaintiffs claim breaches of fiduciary duty, waste, and unjust enrichment against Qualcomm’s directors and its former Chief Financial Officer.

Defendants sought dismissal based on Court of Chancery Rule 23.1, citing failure to make a demand or demonstrate demand futility, and Rule 12(b)(6) for failure to state a claim. The court granted Defendants' motion under Rule 23.1, dismissing all counts of the Complaint.

Key allegations include that Qualcomm violated the FCPA between 2002 and 2012, which prohibits unauthorized payments to foreign officials and mandates adequate internal controls for accurate transaction recording. The Complaint details red flags noted by the Qualcomm board and its Audit Committee regarding FCPA compliance, particularly during an expansion into Asia, notably China, where FCPA compliance is critical due to the prevalence of state-owned enterprises and cultural practices surrounding gifts.

Specific instances cited include inadequate logging of gifts in 2009, reports of potential violations, whistleblower allegations, and a concerning audit report from PricewaterhouseCoopers regarding FCPA compliance processes for a recently acquired entity identified as "QCA."

The SEC issued a cease-and-desist order against Qualcomm on March 1, 2016, for violations of the Foreign Corrupt Practices Act (FCPA). Qualcomm settled with the SEC concurrently with the announcement of the order. The SEC identified several violations, including: 1) provision of meals, gifts, and entertainment to Chinese officials from 2002 to 2012 to influence their decision on adopting Qualcomm technology; 2) hiring relatives of Chinese officials, including a candidate deemed unqualified; 3) inaccurate accounting practices that misclassified illegal gifts as marketing expenses; and 4) inadequate internal controls that failed to ensure authorized transactions were executed and accurately recorded. Qualcomm was penalized $7.5 million and required to submit periodic reports to the SEC for two years.

In assessing demand futility for derivative claims, stockholders must comply with Court of Chancery Rule 23.1 by either making a demand on the board or demonstrating that such demand would be futile. Under the Rales v. Blasband standard, courts evaluate whether the specific allegations in the complaint create reasonable doubt about the board's ability to exercise independent and disinterested judgment. Demand may be excused if the claims pose a substantial threat of liability to a majority of the board, and this assessment is made on a claim-by-claim basis, rather than simply because the directors could be sued themselves.

The Complaint's Count I, alleging breach of fiduciary duty under a Caremark claim, does not sufficiently demonstrate demand futility. According to the Delaware Supreme Court’s ruling in Stone v. Ritter, directors may be liable for failing to implement necessary reporting systems or for failing to monitor those systems after implementation. For a Caremark claim based on the latter, plaintiffs must show that directors knew or should have known about legal violations, acted in bad faith by not addressing those violations, and that this inaction caused harm to the corporation. Plaintiffs typically assert that the board ignored ‘red flags’ indicating misconduct. However, to properly allege bad faith, plaintiffs must provide specific facts suggesting the board intentionally failed to act despite having a known duty to do so. Simply arguing that the board made poor business decisions in response to red flags is inadequate. The Complaint does not claim that the Qualcomm board purposefully caused legal violations, and it fails to present particularized facts indicating a majority of the board is likely liable under the Caremark standard.

The Complaint does not adequately demonstrate that the Qualcomm board acted in bad faith regarding the alleged red flags associated with FCPA violations. Even if the reports to the Audit Committee were considered red flags, the Complaint fails to show that the board consciously ignored them. Many cited documents included planned remedial actions, such as a presentation from April 20, 2009, which acknowledged deficiencies in recording FCPA-related events but also provided recommendations for improvement. Similarly, a January 25, 2010, presentation outlined corrective actions for unrecorded activities in Qualcomm China Gift logs, emphasizing compliance and requiring reviews of expense reports. These responses indicate proactive measures taken by the board rather than any disregard for potential violations. The board's actions suggest they did not believe Qualcomm could continue violating the FCPA without repercussions, and there are no allegations of intentional neglect of duty following awareness of risks.

Plaintiffs cite two primary allegations regarding Qualcomm's inadequate response to red flags concerning FCPA compliance: a delayed target date for translating compliance materials into Chinese and an overdue long-range FCPA plan. However, these board actions do not constitute bad faith, as the Plaintiffs are merely attempting to critique the timing and approach of the board's response, which does not fulfill the requirements of a Caremark claim. The case is distinguished from precedents like In re Massey Energy Co. and Baxter, where boards actively disregarded regulatory compliance. Unlike those instances, Qualcomm's board acknowledged FCPA issues and implemented corrective measures. Furthermore, the Complaint does not assert that the board intended to violate the FCPA, which further differentiates it from Allergan I. Plaintiffs' claim that FCPA violations imply director liability is rejected; Delaware law governs such liability, not the FCPA, and the Plaintiffs fail to demonstrate bad faith under this standard. Additionally, allegations regarding Qualcomm's FCPA compliance program prior to 2009 are not substantiated in the Complaint and may be subject to laches. Consequently, Defendants' motion to dismiss count I is granted.

Count II of the Complaint, alleging corporate waste against Qualcomm's individual Defendants, fails to demonstrate demand futility. The Plaintiffs claim that Qualcomm made illegal bribes in Asia and compensated its directors and officers despite FCPA violations. However, to establish corporate waste, Plaintiffs must prove the transaction was so one-sided that no reasonable business person would find adequate consideration. The board is not likely to face liability as the Complaint does not allege that they authorized any wasteful transactions, nor does it connect the board to the illegal bribes. While the corporation may have a claim against employees involved in the unauthorized gifts, the board remains competent to decide on pursuing such claims. Additionally, there are no allegations that the compensation paid to directors and officers was for inadequate services, further weakening the waste claim. 

Count III, which alleges unjust enrichment due to inflated financial results from FCPA violations, also fails. The Complaint does not provide specific details on how the financial results were inflated or indicate that financial statements were restated, leading to a lack of substantial likelihood of director liability. Both Counts II and III are dismissed, and the motion to dismiss under Court of Chancery Rule 23.1 is granted.